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Things Got Weird for Stablecoin Tether

191 points by jnordwick 8y ago

panarky 8y ago
Lots of smart people have been claiming since 2015 that Tether was a ponzi fraud, that it didn't really have dollars to back the Tethers. But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. Amazing, Tether actually was fully backed by dollars in an actual bank! But then Bitfinex took $625k of Tether reserves to make up for a separate fraud or government asset seizure. Bitfinex took $625 million in real money at a real bank from Tether, and in exchange gave Tether back $625 million in fake money at a fake bank. The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell?
- vkou 8y ago
  > But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. It had... Some amount of money. At a real bank. It's not yet clear that they had all of the reserve money at a real bank.
- b_tterc_p 8y ago
  Not an expert here but I don’t think this is correct. They had some money in the bank. They were supposed to have more. It shouldn’t be surprising that they have some cash given that they have sold so much Tether’s. I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
  - SeanAppleby 8y ago
    At one point their T&S explicitly said that tether had no obligation to buy back tether at any price at any time. They then changed it to be more opaque.
    - jerf 8y ago
      If there's any financial idea the crypto people just do not get, it's the idea of "backing". A currency is not backed by dollars unless I can convert that currency freely back into dollars. It does not constitute "backing" to have the money nominally somewhere in existence, but not actually available. Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same! ("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
      - paganel 8y ago
        > But jerf, what are US dollars backed by I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy. For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market. What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty: > Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10] [1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg [2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
  - panarky 8y ago
    > It’s “backed”, but it is a meaningless idea Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument. Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption. The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
    - treis 8y ago
      >Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? They (or at least some) are. BTC crashed about 10% yesterday.
      - panarky 8y ago
        If people are selling Tether to buy BTC, the price of Tether should decline while the price of BTC should increase. What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
        henryfjordan 8y ago
        My understanding is that the existence of Tether provides liquidity and confidence in BTC (especially the ability to sell quickly). If Tether takes a big confidence hit that might affect BTC strongly.
        grey-area 8y ago
        Are you sure the price of tether is accurate? Are you really sure? It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it. These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
  - deleted 8y ago
    [deleted]
- eunoia 8y ago
  > The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell? They are. Take a look at the BTC spread between USD and USDT exchanges. (almost $300 atm) [1] https://www.cryptocompare.com/coins/btc/markets/USD https://www.cryptocompare.com/coins/btc/markets/USD
  - Canada 8y ago
    Well, every previous incident, those who bet against tether lost. Those who went long on tether picked up a nice quick profit and laughed at the fools on the wrong side of the trade. We'll see what happens this time.
- paulgb 8y ago
  > The real mystery to me is why rational traders continue to buy Tether at $0.9926 Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?
  - panarky 8y ago
    > this is just Tether buying up the supply to keep the peg Buying up the supply with what? Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars. But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
    - paulgb 8y ago
      Skeptics generally claim it's not backed 1:1, not that they have zero dollars left. They can afford to buy up the demand until at some point they can't.
      - jandrese 8y ago
        Otherwise known as a Ponzi scheme.
        jerguismi 8y ago
        More like fractional reserve banking.
        Scoundreller 8y ago
        You can be solvent (assets = liabilities) with fractional cash reserves. You can also be insolvent (assets << liabilities), in which you must be fractional too.
        8y ago
- iambvk 8y ago
  If they are not actually backed by dollar numbers, but with volatile assets (like real estate, stock, metals, or bitcoin, etc.), their holdings are not correct.
  - jfk13 8y ago
    Some gems from their Legal pages: > Tether Tokens are 100% backed by by Tether’s Reserves. But... > “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities; and... > Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
    - tim333 8y ago
      So Tether holders may get redemption in Bitfinex IOUs shortly?
      - vkou 8y ago
        Well, they did just re-invent fractional reserve banking, except without FDIC insurance, or any audit controls.
- dclusin 8y ago
  > Why wouldn't people sell? Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO. Or it could be that Tether market is still irrational. Everyone in the crypto space really wants a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.
  - Scoundreller 8y ago
    Exactly. That’s how pegs are maintained. If Tether has full reserves, it makes sense for them to maintain the peg: buy Tethers at a 1%+ discount and cancel them ad nauseum. I’m sure some desperate holders would even take a 10% haircut right now. This is no different than a corporation’s treasury buying back its own stock and cancelling it.
    - repomies68 8y ago
      Full reserves aren't required to maintain the peg, fractional reserves can work as well. However with fractional reserves there is a risk that the backer might lose money.
- repomies68 8y ago
  People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%. To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.
  - Scoundreller 8y ago
    Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets. But then again, not all of bank’s liabilities are cash either. E.g.: CDs. Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets. We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
    - jerguismi 8y ago
      Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default. In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
      - Scoundreller 8y ago
        The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue. It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves. The value of their loans may be good enough to sell shares to investors instead of selling to another bank. The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits. We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best. What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.
- mannykannot 8y ago
  Another mystery for me is why, if the backing actually existed, did Tether refuse to have that verified through independent auditing? I can think of a couple of reasons why not, but one of them is that it was not actually unencumbered, and another is that it might be inconvenient down the road for it to have been clearly established that, at one point, Tether really did have the cash.
  - tialaramex 8y ago
    Particularly extraordinary because if you're a crook and you need an audit you can get one for a price. All the Big Four firms signed off on accounts at (mostly Eastern European) banks which subsequently turned out to be either straight up frauds or so corrupt that it hardly matters. So Tether not only couldn't manage to get a clean audit they couldn't find a way to bribe their way past this obstacle or they weren't willing to splash the money to do so.
    - tim333 8y ago
      They are reluctant to do that though. It can be very expensive if they get sued.
    - londons_explore 8y ago
      The cost of the audit is the main barrier. The CEO of bitfinex is super stingy, and if something can't be done with minimum wage workers, it probably won't be done at all.
- Tsubasachan 8y ago
  Rational traders? What planet do you live on. Humans are not rational. The world of finances has more to do with psychiatry and sociology.
dpflan 8y ago
Can someone explain the need for and uses for a stablecoin in the world of cryptocurrency?
- toomuchtodo 8y ago
  The desire to represent USD (ie stable value vs wildly volatile crypto) outside of the traditional banking system without the usual compliance (know your customer) and controls (anti money laundering) required of such financial instruments. Fake dollars that track real dollars.
  - dpflan 8y ago
    Thanks for explaining! Is the hope then that a stablecoin is the last step before cash out or that stablecoins would be the more widely accepted for use in the "real world" than Ethereum, Bitcoin, etc? As in, stablecoin could actually be more stable if it were deemed acceptable for normal transactions (i.e. don't buy pizza with Bitcoin, buy it with stablecoin X).
    - defen 8y ago
      The sole purpose of Tether is to sell your Bitcoin (or whatever cryptocurrency) for "dollars". The quotes are important because these "dollars" are not real dollars that you can actually do anything with; they're just a number. Imagine if you had a million dollars in your bank account but there was literally no way to use those dollars to purchase any real-world goods or services. That's what tethers are. Why would you do this? Maybe you think Bitcoin prices are going to drop and you want to "lock in" your dollar value. When you want to actually get real dollars, you have to use your tethers to purchase Bitcoin, then transfer the bitcoin to a real exchange that does real KYC (Gemini, Coinbase, etc), then sell on that exchange for real dollars, which can then get transferred to a real bank account.
      - tim333 8y ago
        You can change your USDT to real USD at Kraken.
josh2600 8y ago
The solution to tether existing is for the US government to release a fiat convertible cryptocurrency pegged to $1 with all of the compliance of traditional banking. Financial institutions would use it, the government could tax it, and all of the kyc/aml could be enforced. It’s not even hard to do. Until that happens, there’s a rational economic narrative for companies of all shapes and sizes to offer these kinds of synthetic dollar-like instruments (and it will also remain rational for regulators to be interested in these enterprises). It’s an interesting time to observe this market (I guess crypto will be interesting for a while). Edit: I guess it's impossible to have a nuanced discussion about cryptocurrency on HackerNews right now. For those of us who have participated in these markets from an institutional level, there are obvious reasons why these synthetic instruments exist beyond evading regulatory controls (which is why Coinbase, who is the most regulatory compliant entity in the industry has a synthetic dollar instrument). There are real technical advantages to having a synthetic instrument that go far beyond regulatory evasion, just ask anyone who operates a regulatory compliant entity in this industry.
- barkingcat 8y ago
  Yah this won't work. The only reason people want crypto currency (especially of the tether type) is that it's based in a non-extradition territory, with no US government oversight and taxation. The lure of Tether is all the (fake) value with none of the taxes or the governmental stuff.
- gowld 8y ago
  What's the use case for that? If that was acceptable to any user, wouldn't they just use regular electronic money?
  - Scoundreller 8y ago
    If you want to move dollars between 2 exchanges in different parts of the world, it’s a pain to do by wire. Some exchanges only deal in crypto. It kinda makes sense: you want to sell barfcoin but it’s only traded at an exchange in Elbonia. So deposit your barfcoins to the Elbonian exchange, trade it for a stablecoin, then move your stablecoin to a local exchange and trade for your local currency.
nickelcitymario 8y ago
Although I agree with the author's position that an awful lot of sketchy things are happening, and I'm sure happy I don't own any of this so-called stable coin, this line bothers me: > If everyone redeemed their Tethers today, it is not clear how Tether would come up with the money This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it. With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist. I'm sure this isn't news to anyone on HN. The pros and cons of Fractional Reserve Banking are well known. But it seems unfair to hold Tether up to a higher standard than even our most established banks. UPDATE: This is one of those can of worms things. A lot of you are making similar arguments, and rather than answer one by one, let me just say: 1) Comparing a run on Tether to a run on ALL of the banks was a poor comparison on my part. 2) Y'all might be right that it wasn't UNFAIR of the author to make the claim above. Tether did make that promise to their customers. 3) Y'all have way more faith in fiat currencies and fractional reserve banking than I do. Cheers.
- phdp 8y ago
  It is different though. The FDIC would force the bank into receivership and return the insured money to account holders. That doesn’t exist for tether.
  - firekvz 8y ago
    Wouldn't this just be the gov giving free money to the banks so they can pay?
    - empath75 8y ago
      They pay for insurance in case this happens.
    - lugg 8y ago
      No.. this only happens if the bank is bust.
ShorsHammer 8y ago
New York AG: Tether lost $800m and then funded it from their crypto exchange. Bitfinex: Poland seized half a billion, Portugal nearly all the rest. Is it really beyond Bloomberg to actually go and ask the Polish or Portuguese government this rather than play he said, she said? There's so many Dunning-Kruger comments/opinion pieces on the matter and years of HN threads about tether that it's all a bit tiring. Bitfinex doesn't serve US customers, people have been calling it's imminent implosion from day one, there's now All-American stable-coin alternatives that surely want their business, ulterior motives could be anywhere. For anyone with yet another confident assertion of it's demise, please jump in and short it against USD right here: https://trade.kraken.com/markets/kraken/usdt/usd/1h https://trade.kraken.com/markets/kraken/usdt/usd/1h Put your money where your mouth is :)
- dmos62 8y ago
  A bit off topic, but Kraken has a history of really bad technical problems with their platform. Culmination as far as I'm concerned, was when it went dead for days after a botched upgrade. So, given that you're criticizing a product for unreliability, there's some irony in that you finish by directing people to Kraken.
  - ShorsHammer 8y ago
    Not really following here, which product was I criticising? Bloomberg? I generally expect a better standard even though it is classed opinion. They've had an entire working day to parse the basic assertions by both parties. As for Kraken, is it preferable they didn't take their time fixing the issue and instead let people deposit money into a bug-ridden neon-flashing hacker target? Caution should probably be appreciated in these matters, the alternative path isn't pretty.
    - dmos62 8y ago
      I wasn't attacking your position. I was warning people about Kraken.
- FireBeyond 8y ago
jcdavis 8y ago
Matt Levine is a national treasure
- IfOnlyYouKnew 8y ago
  He’s the role model of how to get dialectics right without succumbing to bothsiderism. This article is a perfect example: he dismisses the nihilist’s “everything is a fraud” perspective while still heaping some rightful schadenfreude on these shenanigans. Then, he turns it around (again) by mentioning how this situation is partially caused by Tether’s inability to find partners in traditional payment providers. Throughout his work, he never succumbs to either blind love or hatred for anybody or any group (government, media, Musk, Crypto enthusiasts, banks, that Pharma bro). When they are universally hated, he will invariably highlight how creative or entertainingly brazen their exploits were, while still managing not to excuse them. Where others see individual moral failings and call for pitchforks, he looks at the structural issues in law or society that enables them.
  - deleted 8y ago
    [deleted]
- markkurt 8y ago
  His is the one newsletter I haven't unsubscribed from going on 4 years...couldn't agree with you more.
chejazi 8y ago
Summary of Tether's risk, in the author's own comedic gold: Saying “our stablecoin is backed one-for-one by U.S. dollars in a bank” is not quite the same as saying “our stablecoin is backed by an equal notional amount of three-year dollar-denominated loans to our affiliated crypto exchange, much of whose cash is currently frozen.”
jpmattia 8y ago
One thing that has been confusing me about the recent news: $850M is more than "crook" levels of money: It is well into the realm of state-actor or kingpin levels. When that kind of money goes missing, I would expect whole armies of unsavory characters get dispatched for asset recovery. Coincidentally, everyone in those armies is named either Guido or Rocko. So the idea that Poland or Portugal or any other state-actor beginning with the letter "P" might have seized the funds at least provides us with a rationale for how the money remains unrecovered.
rdiddly 8y ago
This is a good contextualization of the news we read yesterday, especially since it brings out some of the humor in it. (All of which is schadenfreude, but still.) Can we agree that the most priceless phrase in all this is "a (believed to be) Panamanian entity"? Not a bank, but an entity. A Panamanian one. Which already sounds shady enough, but then we're not even sure that's what it is. It gives me LOLs.
rlt 8y ago
The craziest thing to me is a lot of people have been claiming Tether was a fraud for years, but according to this it may not have actually had any issues until ~6 months ago. So they decided to prop up Bitfinex with Tether funds long after they were first accused of fraud, even having that spotlight already shining on them. If they wanted credibility they should have completely separated those two businesses, but I suspect Bitfinex makes more money than Tether, and perhaps they wanted the Tether funds as a sort of insurance policy for Bitfinex liquidity.
- hjk05 8y ago
  It seems so weird. If they had the backing at a reputable bank all along, what was with the constant song-and-dance show around not providing a simple external audit proving that point.
cryptoslug 8y ago
LOL at communication logs between Merlin and Oz.
apo 8y ago
It may be baffling that Tether hasn't collapsed yet. But consider the drawn-out drama of the Mt Gox collapse. It took weeks for Mt Gox to unwind. In the time leading up to the finale, many people (who should have known better) insisted that the exchange was secure and fully capitalized. For example, this guy: https://www.youtube.com/watch?v=UP1YsMlrfF0 https://www.youtube.com/watch?v=UP1YsMlrfF0 When incredible spreads started appearing between Gox and competitors, the gullible asked "How can I arbitrage this?" rather than "Where are the exits?" Then they became irate at their inability to withdraw the funds they deposited to make a quick buck. There were others who simply refused to believe the facts staring them in the face. I expect the same to happen here. Settle in, this is going to take awhile to unwind.
0898 8y ago
Tether's payment processor has seemingly swiped the funds. A similar thing happened to Full Tilt Poker. Its payment processer stole its funds and the business collapsed.
zaroth 8y ago
The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent. I blame the Tether guys for not declaring the exchange bankrupt at that point and keeping the Tethers entirely walled off. Tether will have, in part, been brought down by a government agency (assuming that the whole Crypto Capital thing isn’t entirely a scam/front/honeypot). If customers lose funds in this, it traces back to whoever has the Crypto Capital money. It’s not at all surprising that the government would ultimately be responsible for bringing down Tether, since it’s clearly illegal to operate per AML/KYC/FinCen regulations. In the end the entity that confiscated the billion dollars could offer restitution in exchange for an IRS audit. I would guess many would gracefully decline.
- vkou 8y ago
  > The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent. Crypto Capital provided no evidence that the funds have been seized by governments.
  - A2017U1 8y ago
    Bloomberg have the responsibility to confirm it regardless, that's the job of a journalist rather than blindly parroting whatever a company tells you. They are still publishing articles not mentioning the fact despite Polish media confirming it. Low effort journalism.
granaldo 8y ago
Strange how USDT only loses peg temporarily when the news broke. Why is everyone still holding USDT? https://www.coingecko.com/en/coins/tether https://www.coingecko.com/en/coins/tether
vlindos 8y ago
https://en.m.wikipedia.org/wiki/Mt._Gox https://en.m.wikipedia.org/wiki/Mt._Gox Mt. Gox reported 65 mln dollars missing when declared bankruptcy. 8 years later Tether / Bitfinex reports 650 million dollars missing. I wonder what would happen in next few years if so called “decentralized” currencies really become mainstream.

191 points by jnordwick 8y ago

Lots of smart people have been claiming since 2015 that Tether was a ponzi fraud, that it didn't really have dollars to back the Tethers. But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. Amazing, Tether actually was fully backed by dollars in an actual bank! But then Bitfinex took $625k of Tether reserves to make up for a separate fraud or government asset seizure. Bitfinex took $625 million in real money at a real bank from Tether, and in exchange gave Tether back $625 million in fake money at a fake bank. The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell?

vkou 8y ago
> But in fact Tether did have the money, at a real bank, and at this point that bank was Deltec Bank & Trust Ltd. in the Bahamas. It had... Some amount of money. At a real bank. It's not yet clear that they had all of the reserve money at a real bank.
b_tterc_p 8y ago
Not an expert here but I don’t think this is correct. They had some money in the bank. They were supposed to have more. It shouldn’t be surprising that they have some cash given that they have sold so much Tether’s. I also don’t think tether makes it easy (or possible?) to sell Tether’s back for the $1. It’s “backed”, but it is a meaningless idea. It’s all the best parts of a bank without the hard parts. And is basically fraud.
- SeanAppleby 8y ago
  At one point their T&S explicitly said that tether had no obligation to buy back tether at any price at any time. They then changed it to be more opaque.
  - jerf 8y ago
    If there's any financial idea the crypto people just do not get, it's the idea of "backing". A currency is not backed by dollars unless I can convert that currency freely back into dollars. It does not constitute "backing" to have the money nominally somewhere in existence, but not actually available. Heck, who'd like a few hundred thousand jerfcoins? Come and get 'em! They're backed by dollars, in the sense that I guarantee there exists in the world many hundreds of thousands of dollars. jerfcoins don't give you any claim to those dollars, of course, but they're backed by them just the same! ("But jerf, what are US dollars backed by?" Purchasing from the US government the right to not be arrested and thrown in jail for lack of payment on taxes. Just 11 days ago, many people completed trading in their dollars for the year for that backing, so it's definitely a transaction that can done by real people. It may not be an aesthetically pleasing form of backing, but it seems to be working.)
    - paganel 8y ago
      > But jerf, what are US dollars backed by I agree with you almost 100%, just wanted to add that no current Government/State can back the nominal monetary mass flowing through its economy with real money, no matter the amount of taxes they're collecting. The reason being that the nominal monetary mass it's pretty big (to use an euphemism) compared to the real money flowing through the real economy. For example in 2008 the CDS market alone was at some point "valued" at close to $36 trillion [1], while for comparison the US GDP back then I'd say was around $14-15 trillion (give or take a few trillion). Yeas, I know the CDS market back then was a financial abomination, and I do know that a lot of those $36 trillion were probably money counted twice or thrice or even more, but the idea remains. And that's just one market. What indeed still keeps this whole house of cards still standing, what keeps any financial system standing, is trust. And, as you very well put it, once you have the power to put people in jail (or launch inter-continental ballistic missiles) you kind of have a lot of trust by default. But there are moments when no matter how powerful you are you still manage to lose that trust, see the USSR post 1989 or the Spanish Empire during and after the rule of Philip II [2], that's when things turn nasty: > Charles V had left his son Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt caused Phillip II to default on loans in 1557, 1560, 1575, and 1596 (including debt to Poland, known as Neapolitan sums). Lenders had no power over the King and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as its kings would default six more times in the next 65 years.[9] Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened the Spanish kingdoms and would, in the following century, contribute to its decline, as maintained by some historians.[10] [1] https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg https://www.bis.org/publ/qtrpdf/r_qt1806/images/graph-1.jpg [2] https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy https://en.wikipedia.org/wiki/Philip_II_of_Spain#Economy
- panarky 8y ago
  > It’s “backed”, but it is a meaningless idea Let's assume that it's impossible to sell Tethers for dollars. I don't think that's completely true, but that's the "steel man" argument. Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? You would know this was happening if the price of Tether dropped far below $1.00, or if the supply of Tether contracted as Tethers were destroyed on redemption. The fact that we don't see either of these things tells me that the backing isn't actually "meaningless". Rational traders with their own capital at stake don't appear to be selling.
  - treis 8y ago
    >Even if you can't sell for dollars, you definitely can sell for BTC, ETH, XRP, etc. Why don't people liquidate their Tether to buy other cryptocurrency? They (or at least some) are. BTC crashed about 10% yesterday.
    - panarky 8y ago
      If people are selling Tether to buy BTC, the price of Tether should decline while the price of BTC should increase. What actually happened is the price of Tether dropped < 1% and the price of BTC reverted to where it was a week ago.
      - henryfjordan 8y ago
        My understanding is that the existence of Tether provides liquidity and confidence in BTC (especially the ability to sell quickly). If Tether takes a big confidence hit that might affect BTC strongly.
      - grey-area 8y ago
        Are you sure the price of tether is accurate? Are you really sure? It appears to be defying gravity while the backer is accused of fraud and doesn't have funds to back it. These exchanges are unregulated and unaudited, the movements in price are inexplicable, and the simplest explanation is fraud.
- deleted 8y ago
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eunoia 8y ago
> The real mystery to me is why rational traders continue to buy Tether at $0.9926, less than 1% from parity with USD. Why wouldn't people sell? They are. Take a look at the BTC spread between USD and USDT exchanges. (almost $300 atm) [1] https://www.cryptocompare.com/coins/btc/markets/USD https://www.cryptocompare.com/coins/btc/markets/USD
- Canada 8y ago
  Well, every previous incident, those who bet against tether lost. Those who went long on tether picked up a nice quick profit and laughed at the fools on the wrong side of the trade. We'll see what happens this time.
paulgb 8y ago
> The real mystery to me is why rational traders continue to buy Tether at $0.9926 Unless there is reason to believe otherwise that I'm not aware of, shouldn't we assume that this is just Tether buying up the supply to keep the peg? Isn't that how a stablecoin is supposed to work?
- panarky 8y ago
  > this is just Tether buying up the supply to keep the peg Buying up the supply with what? Skeptics claim Tether isn't backed by actual dollars, so it's impossible to convert Tether for dollars. But if Tether is buying up the supply, what are the sellers of Tether receiving in return? If they're getting dollars, then doesn't that refute the skeptics' claims?
  - paulgb 8y ago
    Skeptics generally claim it's not backed 1:1, not that they have zero dollars left. They can afford to buy up the demand until at some point they can't.
    - jandrese 8y ago
      Otherwise known as a Ponzi scheme.
      - jerguismi 8y ago
        More like fractional reserve banking.
        Scoundreller 8y ago
        You can be solvent (assets = liabilities) with fractional cash reserves. You can also be insolvent (assets << liabilities), in which you must be fractional too.
        8y ago
iambvk 8y ago
If they are not actually backed by dollar numbers, but with volatile assets (like real estate, stock, metals, or bitcoin, etc.), their holdings are not correct.
- jfk13 8y ago
  Some gems from their Legal pages: > Tether Tokens are 100% backed by by Tether’s Reserves. But... > “Reserves” means traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities; and... > Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens, and Tether reserves the right to redeem Tether Tokens by in-kind redemptions of securities and other assets held in the Reserves. So even if they agree to redeem your Tether Tokens (which they do not promise to do), you might get some other kind of "security" rather than actual cash. If that happened to be another crypto token, for example, and if you then have trouble exchanging that token for cash (or its value is busy crashing)... well, too bad.
  - tim333 8y ago
    So Tether holders may get redemption in Bitfinex IOUs shortly?
    - vkou 8y ago
      Well, they did just re-invent fractional reserve banking, except without FDIC insurance, or any audit controls.
dclusin 8y ago
> Why wouldn't people sell? Tether could be intervening in the markets and propping it up with reserves, similar to how banks prop up a stock for a while after IPO. Or it could be that Tether market is still irrational. Everyone in the crypto space really wants a stablecoin that trades for a dollar. The number of people who trade and desire to have such a coin could outnumber the more rational market participants who say it's worthless.
- Scoundreller 8y ago
  Exactly. That’s how pegs are maintained. If Tether has full reserves, it makes sense for them to maintain the peg: buy Tethers at a 1%+ discount and cancel them ad nauseum. I’m sure some desperate holders would even take a 10% haircut right now. This is no different than a corporation’s treasury buying back its own stock and cancelling it.
  - repomies68 8y ago
    Full reserves aren't required to maintain the peg, fractional reserves can work as well. However with fractional reserves there is a risk that the backer might lose money.
repomies68 8y ago
People trust banks, even when the fiat in banks isn't fully backed. Usually the reserve ration is backed to something like 10%. To my understanding tether is just like a bank, except the accounts are kept on Blockchain instead of private database. So, it is rational to use them if you think they habe enough reserves to keep them liquid. Full backing is not needed, as it isn't needed with banks as well.
- Scoundreller 8y ago
  Banks generally have full backing, verified by frequent auditing, it just may not be all cash or cash-like assets. But then again, not all of bank’s liabilities are cash either. E.g.: CDs. Things get hairy when their long-term assets go down in value and/or there’s a sudden demand for withdrawals triggering a mismatch between short-term liabilities and long-term assets. We have strikingly little audits from this stablecoin. Do assets match liabilities or not? For a bank, they always will or else they get shutdown before losses become too great.
  - jerguismi 8y ago
    Yeah they are loans, like apartment loans. The loan might be for something like 20 years and might default. In my opinion having assets like house loans is pretty far away from being "backed". If enough customers want their money out, bank can go bust. If they have lent the money to wrong people, they also can go bust. Banks go bust now and then.
    - Scoundreller 8y ago
      The bank can sell the loan off to another bank if it needs cash now. It could be at a loss, or it could be at a profit depending on how interest rates chgd since issue. It takes a lot for a bank to go bust when they can do that with their assets if they go through their reserves. The value of their loans may be good enough to sell shares to investors instead of selling to another bank. The trick is to loan out to lots of different people so any one group being “wrong” is made up with profits. We’re seeing none of that with this stablecoin. They’ve put a huge chunk of money into a ???bank(s) in a ??? country, at best. What’s your definition of “backed”? Banks will gladly keep your fiat in an insured safety deposit box, but they’re going to charge you for the privilege. And the government will just inflate away your attempt at deflation.
mannykannot 8y ago
Another mystery for me is why, if the backing actually existed, did Tether refuse to have that verified through independent auditing? I can think of a couple of reasons why not, but one of them is that it was not actually unencumbered, and another is that it might be inconvenient down the road for it to have been clearly established that, at one point, Tether really did have the cash.
- tialaramex 8y ago
  Particularly extraordinary because if you're a crook and you need an audit you can get one for a price. All the Big Four firms signed off on accounts at (mostly Eastern European) banks which subsequently turned out to be either straight up frauds or so corrupt that it hardly matters. So Tether not only couldn't manage to get a clean audit they couldn't find a way to bribe their way past this obstacle or they weren't willing to splash the money to do so.
  - tim333 8y ago
    They are reluctant to do that though. It can be very expensive if they get sued.
  - londons_explore 8y ago
    The cost of the audit is the main barrier. The CEO of bitfinex is super stingy, and if something can't be done with minimum wage workers, it probably won't be done at all.
Tsubasachan 8y ago
Rational traders? What planet do you live on. Humans are not rational. The world of finances has more to do with psychiatry and sociology.

dpflan 8y ago

Can someone explain the need for and uses for a stablecoin in the world of cryptocurrency?

toomuchtodo 8y ago
The desire to represent USD (ie stable value vs wildly volatile crypto) outside of the traditional banking system without the usual compliance (know your customer) and controls (anti money laundering) required of such financial instruments. Fake dollars that track real dollars.
- dpflan 8y ago
  Thanks for explaining! Is the hope then that a stablecoin is the last step before cash out or that stablecoins would be the more widely accepted for use in the "real world" than Ethereum, Bitcoin, etc? As in, stablecoin could actually be more stable if it were deemed acceptable for normal transactions (i.e. don't buy pizza with Bitcoin, buy it with stablecoin X).
  - defen 8y ago
    The sole purpose of Tether is to sell your Bitcoin (or whatever cryptocurrency) for "dollars". The quotes are important because these "dollars" are not real dollars that you can actually do anything with; they're just a number. Imagine if you had a million dollars in your bank account but there was literally no way to use those dollars to purchase any real-world goods or services. That's what tethers are. Why would you do this? Maybe you think Bitcoin prices are going to drop and you want to "lock in" your dollar value. When you want to actually get real dollars, you have to use your tethers to purchase Bitcoin, then transfer the bitcoin to a real exchange that does real KYC (Gemini, Coinbase, etc), then sell on that exchange for real dollars, which can then get transferred to a real bank account.
    - tim333 8y ago
      You can change your USDT to real USD at Kraken.

josh2600 8y ago

The solution to tether existing is for the US government to release a fiat convertible cryptocurrency pegged to $1 with all of the compliance of traditional banking. Financial institutions would use it, the government could tax it, and all of the kyc/aml could be enforced. It’s not even hard to do. Until that happens, there’s a rational economic narrative for companies of all shapes and sizes to offer these kinds of synthetic dollar-like instruments (and it will also remain rational for regulators to be interested in these enterprises). It’s an interesting time to observe this market (I guess crypto will be interesting for a while). Edit: I guess it's impossible to have a nuanced discussion about cryptocurrency on HackerNews right now. For those of us who have participated in these markets from an institutional level, there are obvious reasons why these synthetic instruments exist beyond evading regulatory controls (which is why Coinbase, who is the most regulatory compliant entity in the industry has a synthetic dollar instrument). There are real technical advantages to having a synthetic instrument that go far beyond regulatory evasion, just ask anyone who operates a regulatory compliant entity in this industry.

barkingcat 8y ago
Yah this won't work. The only reason people want crypto currency (especially of the tether type) is that it's based in a non-extradition territory, with no US government oversight and taxation. The lure of Tether is all the (fake) value with none of the taxes or the governmental stuff.
gowld 8y ago
What's the use case for that? If that was acceptable to any user, wouldn't they just use regular electronic money?
- Scoundreller 8y ago
  If you want to move dollars between 2 exchanges in different parts of the world, it’s a pain to do by wire. Some exchanges only deal in crypto. It kinda makes sense: you want to sell barfcoin but it’s only traded at an exchange in Elbonia. So deposit your barfcoins to the Elbonian exchange, trade it for a stablecoin, then move your stablecoin to a local exchange and trade for your local currency.

nickelcitymario 8y ago

Although I agree with the author's position that an awful lot of sketchy things are happening, and I'm sure happy I don't own any of this so-called stable coin, this line bothers me: > If everyone redeemed their Tethers today, it is not clear how Tether would come up with the money This is true of banks, too. In fact, if everyone took out all of their money from all of the banks, there isn't enough real money in existence to cover it. With Tether, it is at least plausible that the money still exists and is simply frozen due to some terrible business decisions. With banks, the money doesn't exist. I'm sure this isn't news to anyone on HN. The pros and cons of Fractional Reserve Banking are well known. But it seems unfair to hold Tether up to a higher standard than even our most established banks. UPDATE: This is one of those can of worms things. A lot of you are making similar arguments, and rather than answer one by one, let me just say: 1) Comparing a run on Tether to a run on ALL of the banks was a poor comparison on my part. 2) Y'all might be right that it wasn't UNFAIR of the author to make the claim above. Tether did make that promise to their customers. 3) Y'all have way more faith in fiat currencies and fractional reserve banking than I do. Cheers.

phdp 8y ago
It is different though. The FDIC would force the bank into receivership and return the insured money to account holders. That doesn’t exist for tether.
- firekvz 8y ago
  Wouldn't this just be the gov giving free money to the banks so they can pay?
  - empath75 8y ago
    They pay for insurance in case this happens.
  - lugg 8y ago
    No.. this only happens if the bank is bust.

ShorsHammer 8y ago

New York AG: Tether lost $800m and then funded it from their crypto exchange. Bitfinex: Poland seized half a billion, Portugal nearly all the rest. Is it really beyond Bloomberg to actually go and ask the Polish or Portuguese government this rather than play he said, she said? There's so many Dunning-Kruger comments/opinion pieces on the matter and years of HN threads about tether that it's all a bit tiring. Bitfinex doesn't serve US customers, people have been calling it's imminent implosion from day one, there's now All-American stable-coin alternatives that surely want their business, ulterior motives could be anywhere. For anyone with yet another confident assertion of it's demise, please jump in and short it against USD right here: https://trade.kraken.com/markets/kraken/usdt/usd/1h https://trade.kraken.com/markets/kraken/usdt/usd/1h Put your money where your mouth is :)

dmos62 8y ago
A bit off topic, but Kraken has a history of really bad technical problems with their platform. Culmination as far as I'm concerned, was when it went dead for days after a botched upgrade. So, given that you're criticizing a product for unreliability, there's some irony in that you finish by directing people to Kraken.
- ShorsHammer 8y ago
  Not really following here, which product was I criticising? Bloomberg? I generally expect a better standard even though it is classed opinion. They've had an entire working day to parse the basic assertions by both parties. As for Kraken, is it preferable they didn't take their time fixing the issue and instead let people deposit money into a bug-ridden neon-flashing hacker target? Caution should probably be appreciated in these matters, the alternative path isn't pretty.
  - dmos62 8y ago
    I wasn't attacking your position. I was warning people about Kraken.
FireBeyond 8y ago

jcdavis 8y ago

Matt Levine is a national treasure

IfOnlyYouKnew 8y ago
He’s the role model of how to get dialectics right without succumbing to bothsiderism. This article is a perfect example: he dismisses the nihilist’s “everything is a fraud” perspective while still heaping some rightful schadenfreude on these shenanigans. Then, he turns it around (again) by mentioning how this situation is partially caused by Tether’s inability to find partners in traditional payment providers. Throughout his work, he never succumbs to either blind love or hatred for anybody or any group (government, media, Musk, Crypto enthusiasts, banks, that Pharma bro). When they are universally hated, he will invariably highlight how creative or entertainingly brazen their exploits were, while still managing not to excuse them. Where others see individual moral failings and call for pitchforks, he looks at the structural issues in law or society that enables them.
- deleted 8y ago
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markkurt 8y ago
His is the one newsletter I haven't unsubscribed from going on 4 years...couldn't agree with you more.

chejazi 8y ago

Summary of Tether's risk, in the author's own comedic gold: Saying “our stablecoin is backed one-for-one by U.S. dollars in a bank” is not quite the same as saying “our stablecoin is backed by an equal notional amount of three-year dollar-denominated loans to our affiliated crypto exchange, much of whose cash is currently frozen.”

jpmattia 8y ago

One thing that has been confusing me about the recent news: $850M is more than "crook" levels of money: It is well into the realm of state-actor or kingpin levels. When that kind of money goes missing, I would expect whole armies of unsavory characters get dispatched for asset recovery. Coincidentally, everyone in those armies is named either Guido or Rocko. So the idea that Poland or Portugal or any other state-actor beginning with the letter "P" might have seized the funds at least provides us with a rationale for how the money remains unrecovered.

rdiddly 8y ago

This is a good contextualization of the news we read yesterday, especially since it brings out some of the humor in it. (All of which is schadenfreude, but still.) Can we agree that the most priceless phrase in all this is "a (believed to be) Panamanian entity"? Not a bank, but an entity. A Panamanian one. Which already sounds shady enough, but then we're not even sure that's what it is. It gives me LOLs.

rlt 8y ago

The craziest thing to me is a lot of people have been claiming Tether was a fraud for years, but according to this it may not have actually had any issues until ~6 months ago. So they decided to prop up Bitfinex with Tether funds long after they were first accused of fraud, even having that spotlight already shining on them. If they wanted credibility they should have completely separated those two businesses, but I suspect Bitfinex makes more money than Tether, and perhaps they wanted the Tether funds as a sort of insurance policy for Bitfinex liquidity.

hjk05 8y ago
It seems so weird. If they had the backing at a reputable bank all along, what was with the constant song-and-dance show around not providing a simple external audit proving that point.

cryptoslug 8y ago

LOL at communication logs between Merlin and Oz.

apo 8y ago

It may be baffling that Tether hasn't collapsed yet. But consider the drawn-out drama of the Mt Gox collapse. It took weeks for Mt Gox to unwind. In the time leading up to the finale, many people (who should have known better) insisted that the exchange was secure and fully capitalized. For example, this guy: https://www.youtube.com/watch?v=UP1YsMlrfF0 https://www.youtube.com/watch?v=UP1YsMlrfF0 When incredible spreads started appearing between Gox and competitors, the gullible asked "How can I arbitrage this?" rather than "Where are the exits?" Then they became irate at their inability to withdraw the funds they deposited to make a quick buck. There were others who simply refused to believe the facts staring them in the face. I expect the same to happen here. Settle in, this is going to take awhile to unwind.

0898 8y ago

Tether's payment processor has seemingly swiped the funds. A similar thing happened to Full Tilt Poker. Its payment processer stole its funds and the business collapsed.

zaroth 8y ago

The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent. I blame the Tether guys for not declaring the exchange bankrupt at that point and keeping the Tethers entirely walled off. Tether will have, in part, been brought down by a government agency (assuming that the whole Crypto Capital thing isn’t entirely a scam/front/honeypot). If customers lose funds in this, it traces back to whoever has the Crypto Capital money. It’s not at all surprising that the government would ultimately be responsible for bringing down Tether, since it’s clearly illegal to operate per AML/KYC/FinCen regulations. In the end the entity that confiscated the billion dollars could offer restitution in exchange for an IRS audit. I would guess many would gracefully decline.

vkou 8y ago
> The sad reality appears to be that Tether was fully backed dollar-for-dollar by USD in a reputable bank, but that the associated cryptoexchange owned and operated by the same people got robbed by a government entity and left them insolvent. Crypto Capital provided no evidence that the funds have been seized by governments.
- A2017U1 8y ago
  Bloomberg have the responsibility to confirm it regardless, that's the job of a journalist rather than blindly parroting whatever a company tells you. They are still publishing articles not mentioning the fact despite Polish media confirming it. Low effort journalism.

granaldo 8y ago

Strange how USDT only loses peg temporarily when the news broke. Why is everyone still holding USDT? https://www.coingecko.com/en/coins/tether https://www.coingecko.com/en/coins/tether

vlindos 8y ago

https://en.m.wikipedia.org/wiki/Mt._Gox https://en.m.wikipedia.org/wiki/Mt._Gox Mt. Gox reported 65 mln dollars missing when declared bankruptcy. 8 years later Tether / Bitfinex reports 650 million dollars missing. I wonder what would happen in next few years if so called “decentralized” currencies really become mainstream.